GM's (GM) Stock: Now Just A Junk Bond

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GM’s (GM) stock can no longer be viewed as equity in the sense that it would be at most companies. It does trade on the NYSE, at an average volume of 28 million shares a day. But, at less than $6 a share, the value of the transactions from market open to market close are tiny.

GM shares now trade at a remarkably low 2% of annual revenue.

As the largest car company in the US reported at 45% drop in sales for October, GM’s stock barely moved at all which would seem to be puzzling.

Through most of the early afternoon, GM was down about 3% to $5.60. That is still above the 52-week low of $4. The stock is no longer even a reasonable proxy for the firm’s value. With its cash position dropping, ratings agencies expect the company could be insolvent by the middle of next year. Buying a share of General Motors is now virtually the same as buying a junk bond in a company with a high risk of default. The yield could be 40% or more, but the risk of that continuing to pay out is small.

The market is pricing GM shares based on a high degree of probability that the value of the firm’s equity will go to zero. An event involving a buyout of Chrysler with some outside capital coming in, perhaps from the Fed, is low. On the off chance it happens, GM could double but the equity value of the firm is still essentially zilch.

GM’s shares still trade, but, at the end of the day, that does not mean much

Douglas A. McIntyre